Since candlesticks are the basic building block of most technical analysis, the ability to read the patterns they make is a valuable trading skill. Here, we’ll go over everything you need to know to make money with three-line strike candlestick patterns.
First though, let’s start with a definition.
What Is a Three-Line Strike Candlestick Pattern?
A three-line strike pattern is a 4-candlestick formation that may signal a reversal. It consists of three large candles moving with the current trend followed by a large candle moving against the trend that is preceded by a gap and closes beyond the open of the first candle.
***Please note, many sources list the three-line strike as a continuation pattern. However, various quantitative analyses show that it actually acts as a reversal pattern, which also matches the way the pattern looks.
The three-line strike pattern has both bearish and bullish versions (though these labels are inverted). It is also similar to the engulfing, three outside, breakaway, and ladder patterns. For all of these patterns, the final candle becomes the beginning of the potential reversal.
Of course, candlestick patterns do not guarantee specific outcomes. Instead, they offer clues as to what is going on in the market.
So the question is, what do 3-line strikes really tell you?
What Three-Line Strike Patterns Mean
Three-line strikes may have the worst naming conventions of any candlestick pattern.
Unlike some patterns, English speakers do not use the Japanese name for this one. Instead, the term “three-line strike” is probably meant to represent the fact that the fourth candle cancels (or strikes) out the action of the first three. While this does make some sense, you’d assume a “three line” pattern would have only three lines.
Moreover, a “bullish” three line strike is actually a bearish reversal pattern while a “bearish” three line strike is actually a bullish reversal pattern. In our estimation, these patterns were mislabeled at some point because this doesn’t make any sense.
In trading terms:
- During the first three periods, price drove strongly in the direction of the trend.
- Before the fourth period began, price moved in the direction of the trend.
- During the fourth period, price drove strongly in the opposite direction of the trend and closed beyond the open of the first period.
This sets the stage for reversal, as the trend appears to have struck out.
How To Recognize 3-Line Strike Candlestick Patterns
Traders are attracted to patterns partly because they stand out.
However, it’s easy to see things on the charts that aren’t truly there (or anticipate events that never come to fruition). That’s the main reason you should wait for all candles to close before making decisions based on candlestick patterns.
In theory, a three-line strike must:
- Begin with three long candles moving with the pre-existing trend.
- End with a long candle that 1) opens with a gap, 2) moves against trend, and 3) closes beyond the open of the first.
In practicality, many traders will make some exceptions.
- The first three candles don’t all necessarily have to be long candles, as long as they represent a significant cumulative price change.
- The fourth candle doesn’t necessarily have to open with a gap, as long as it closes beyond the open of the first and all other criteria are met.
- The fourth candle doesn’t necessarily have to close beyond the open of the first, as long as it closes near it and all other criteria are met.
Depending on who you ask, any of these standards may be more or less important. Technically, it would be more accurate to classify some of these variants as a different candlestick reversal pattern.
This is okay, as the implication means more than the classification. And similar patterns tend to have similar implications.
That’s not to say that these standards are altogether inconsequential (as we’ll elaborate on soon). You should definitely consider some non-negotiable, like the direction of the candles in relation to trend. Just keep in mind that context trumps criteria.
Ultimately, it’s up to you to decide how seriously to take each guideline.
After all, the goal of candlestick pattern analysis is to interpret underlying price action (not just label patterns correctly).
To this end, you need to understand where they fit.
Where Three Line Strikes Fit in the Chart Narrative
The markets are often characterized as a battle between the bulls and the bears.
Three-line strike patterns show that those trading on the side of trend pressed their advantage on candles one through three (and between candles three and four) then surrendered the momentum completely by the end of candle four.
On the chart, it looks like a price action cul-de-sac.
The first day saw a powerful trending move. The second and third days saw the same. On the fourth day, traders awoke to a gap. Yet to everyone’s surprise, price began to move in the opposite direction as some trend-side traders began to take profits. This counter-trend action rapidly became more and more dramatic. By the end of the fourth day, price had fully retraced the movement of the previous three days to close beyond the original open.
Over the coming days, the range between the first open and last close is likely to become a crucial decision zone. If those looking for reversal can defend this price band, they have a better chance at making the trend change stick.
(This is only a hypothetical illustration, as a three-line strike pattern could represent a number of real-world scenarios.)
In the short-term, it amounts to a devastating counterattack.
The question traders need to ask themselves is,
“Can trend-side traders strike back or will this lead to a full reversal?”
To answer that question, you’ll need more than just an understanding of Japanese candlesticks and candlestick patterns. You’ll want to evaluate both within the context of longer-term chart patterns as well as trend and price levels. You’ll also want to make use of your own chart markup and indicators.
Explore the history of your preferred asset(s) with respect to three-line strike patterns and apply your findings to your own trading style.
Now, you can test (and/or stretch) the criteria we mentioned earlier to identify the best trade setups. For instance, you may find that three-line strikes that end with a marubozu candle perform more reliably. Or, you may find something else entirely.
This is the kind of technical analysis that brings the story in the charts into full focus.
How To Trade Three-Line Strike Patterns
Reversal points are great places to enter or exit trades, especially when you catch them early enough.
Three-line strike candlestick patterns serve as easy-to-spot signs of potential reversal and may even lead to cycle-defining tops or bottoms. Generally, you can assign greater weight to multi-stick patterns than single candles because they give you more information over a longer duration.
However, there are a few things you should know about trading candlestick patterns.
First and foremost, they never have a 100% hit rate. According to Bulkowski’s Encyclopedia of Candlestick Patterns, if you treat them as reversal signals, bullish 3 line strikes have a 84% hit rate while bearish 3 line strikes have a 65% hit rate. Although these numbers are pretty good compared to most candlestick patterns, they are not a “sure thing”. And obviously, this comes in direct opposition to the continuation signal narrative.
In addition, candlestick patterns do not have standardized price targets or measured moves like chart patterns do. This can make it difficult to decide when to get out of your trade or how to manage your stop loss.
Moreover, failed reversal patterns often lead to continuation or consolidation. Therefore, you need additional points of confirmation to increase your odds of success.
Some such factors include:
- Volume – Reversals are often accompanied by elevated trading volume. For three-line strike patterns, you want to see a spike on the fourth candle (or just after).
- Price Formations – Reversal patterns that form on the right side of important price levels or trend lines are often more reliable. Always be aware of support and resistance!
- Oscillator Shift – Oscillating indicators like the RSI or stochastics are commonly used to identify reversals by analyzing slope, percentile, and/or divergence.
The more corroborating elements are present, the more confident you can be about a three-line strike reversal signal.
Even so, it would be difficult to form a successful trading strategy around any given candlestick pattern. There simply isn’t enough there to develop a strong edge. Even with a great understanding of trading math, order execution, market psychology, risk management, options, and automation, you’d still have a hard time.
In essence, three line strike patterns are more useful idea givers than trade makers.
Better yet, you’ll probably find more success building your strategy around other tools then using candlestick patterns as the final point of confirmation.
Other Candlestick Pattern Types
The three-line strike is but one of many candlestick patterns.
And while learning them all is not a prerequisite for successful trading, you’d certainly benefit from getting familiar with other candlestick pattern types.
They can be categorized in several ways.
The most straightforward way may be by the number of candlesticks (ie. 2-candlestick, 3-candlestick, 5-candlestick, etc.)
More helpful though, you can group them by price direction or signal type. That is, they can be bullish or bearish and/or imply reversal or continuation. Finally, you can multiply these designations together to separate them into bullish reversal, bearish reversal, bullish continuation, and bearish continuation categories.
On the other hand, you might just tackle them in alphabetical order:
- Abandoned Baby
- Breakaway
- Counterattack Lines
- Doji Star
- Engulfing
- Harami
- Harami Cross
- In Neck
- Kicking
- Ladder
- Last Engulfing
- Mat Hold
- Matching
- Meeting Lines
- On Neck
- Separating Lines
- Star
- Stomach
- Tasuki Gap
- Three Inside
- Three Methods
- Three Outside
- Tri-Star
- Tweezer
- Window
Sure, there are quite a few. But don’t let that intimidate you.
It’s unnecessary to memorize the name and criteria of every single pattern. The key is to learn the principles of price action and technical analysis.
In fact, you’re free to forget all of their names and specifications as long as you can look at a group of candlesticks and understand what they are trying to tell you. It’s just that the more of them you learn about, the easier this will become.
So take the time to study at least a few more of them.
Takeaways
To review:
3-line strikes are a type of candlestick pattern that signal a potential reversal. While not a guarantee, their appearance may indicate that market conditions are changing. Thus, they can help you find winning trades.
Of course, there are other candlestick patterns that you should learn about. Still, the ability to recognize patterns is not enough to trade successfully on its own.
Nonetheless, you’ve now added one more tool to your toolkit.
Have questions or more information to add? Contribute to the conversation in the comments below! Or, if you know someone who could benefit from this post, share it with them. You can also check out our Candlestick Patterns Guide to improve your candlestick analysis skills.